Reductions in taxes on dividends and capital gains.

If you are an investor, you will be happy to know that there is a reduction in the taxes on dividends and capital gains, which will result in considerable tax savings for taxpayers. Here are more details regarding dividends and capital gains under the Act.

Under the 2003 Act, effective for sales and exchanges (and installment payments received) after May 5, 2003, and before Jan. 1, 2009, the 10% and 20% rates on adjusted net capital gain are reduced to 5% (zero, in 2008) and 15% respectively, for both regular tax and the alternative minimum tax (AMT). The lower rates apply to sales of capital assets held more than one year. Because this 5% drop in the capital gains rate is more than the 3.6% drop in the top individual rate under the 2003 Act and the 2% drop in other individual rates, the advantage of long-term capital gains over other types of taxable income is even greater for high earners than it was before.

However it should be noted, that there is no cut in the 28% capital gains rate affecting collectibles and certain small business stock and the 25% rate affecting gains representing depreciation claimed on MACRS realty.

For dividends received in tax years beginning after 2002 and before 2009, dividends received by an individual shareholder from domestic corporations are taxed at rates of 5% (zero, in 2008) and 15% for both regular tax and AMT purposes. This results in substantial tax savings for dividend recipients given the fact that, under pre-2003 Act law, the dividends were taxed as ordinary income at rates up to 38.6%.

Acceleration of previously enacted tax benefits and reductions for individuals.

The 2003 Act speeds up previously enacted tax benefits and reductions that were scheduled to be phased in over the next several years. These acceleration provisions include:

... Acceleration of 10% individual income tax rate bracket expansion. The expansion in the width of the 10% rate bracket for single and joint filers is accelerated from 2008 to 2003. Thus, under the 2003 Jobs and Growth Act, the 10% tax bracket for 2003 ends at $14,000 (up from $12,000) of taxable income for joint filers and $7,000 (up from $6,000) for single filers and marrieds filing separately, and for 2004, both these figures will be indexed for inflation. The endpoint of the 10% bracket for heads of household remains unchanged at $12,000.

... Acceleration of reduction in individual income tax rates. The 2003 Act change that will affect the widest number of taxpayers is an immediate reduction of the marginal tax brackets paid by all but the lowest earners. Under the change, the tax rates above 15% for 2003 and later years are 25%, 28%, 33%, and 35% (previously, rates for 2003 above 15% were 27%, 30%, 35%, and 38.6%).

... Acceleration of marriage-penalty relief. The 2003 Act reduces so-called marriage penalties (i.e., tax-law provisions that force two-income couples to pay more in taxes each year than single individuals merely because they are married). The basic standard deduction amount for joint returns will be double ($9,500 for 2003) the basic standard deduction amount for single returns. Furthermore, in 2003 and 2004, the end point of the 15% tax bracket for joint returns will be twice the end point of the 15% tax bracket for single returns. In other words, for 2003, the 15% tax bracket for joint filers applies to taxable income over $14,000 (up from $12,000) but not over $56,800 (up from $47,450).

... Acceleration of increase in child tax credit. For 2003, 2004 and 2005, the child tax credit will increase to $1,000 per qualifying dependent child under 17 (up from the $600 per qualifying child for 2003-2004 and $700 for 2005 that was provided for under pre-2003 Jobs and Growth Act law. For 2003, the increased amount of the child tax credit will be paid in advance beginning in mid-July over a period of three weeks. Thus, a qualifying family will receive an advance payment check for up to $400 per qualifying child who is under age 17 as of the end of 2003. The payments will be paid based on the 2002 information.  In order to qualify for the advance payment, you must have had a qualifying child in 2002 who is still under age 17.

... Minimum tax relief to individuals. For 2003 and 2004, the maximum AMT exemption for joint filers and surviving spouses is increased to $58,000 (up from $49,000 under pre-2003 Jobs and Growth Act law) and for unmarried taxpayers is increased to $40,250 (up from $35,750).

Tax changes for businesses and corporations.

The 2003 Act includes changes to the Section 179 rules and to the bonus depreciation deduction created with The Job Creation and Worker Assistance Act of 2002. 

The 2003 Jobs and Growth Act allows small businesses to expense significantly more of the cost of tangible depreciable personal property purchased and placed in service during the tax year in an active trade or business. All of the following expensing changes are effective for tax years beginning after 2002 and before 2006:

... The maximum annual expensing amount is $100,000 (it was $25,000 before).

... The maximum annual expensing amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds a specified dollar level. This dollar level is increased to $400,000 (from $200,000).

... The above increased dollar amounts will be inflation-indexed for tax years beginning after 2003.

... Off-the-shelf computer software is made eligible for expensing.

... Taxpayer revocation of expensing elections will no longer require IRS consent.

A second major change affecting businesses is an increase to 50% (from 30%) of the bonus depreciation allowed in the first year and an extension of time to qualify for the first-year bonus depreciation.  The following changes have been made with the new act:

... To qualify for the  30% bonus first-year depreciation, property can be acquired before 2005 (changed from September 11, 2004 ).

... To qualify for the 50% bonus first-year depreciation property must be qualified property, and (1) its original use commences with the taxpayer after May 5, 2003; (2) the asset is acquired by the taxpayer after May 5, 2003 and before 2005 (there can't be a written binding contract for acquisition in effect before May 6, 2003); and (3) it is placed in service by the taxpayer before 2005 (before 2006 for certain property with longer production periods).

... Taxpayers can elect on a class-by-class basis to claim 30% instead of 50% bonus first-year depreciation for qualifying property, or elect not to claim bonus first-year depreciation at all.

... The 2003 Act increases by $7,650 the first-year depreciation allowance for new business autos that are bought and placed in service after May 5, 2003 , and before 2005.  This allows a business to claim a first-year depreciation allowance of $10,710 for a passenger auto ($3,060 dollar cap plus $7,650). This represents the maximum amount it can deduct for expensing, the bonus first-year depreciation allowance and the regular first-year depreciation allowance.

Note that there still is no AMT depreciation adjustment for the entire recovery period of qualified property recovered under the bonus first-year depreciation rules (50% or 30%).

Another change for corporations affects only the estimated tax payment rules for 2003. 25% of the amount of any required installment of corporate estimated tax which is otherwise due on September 15, 2003 will not be due until October 1, 2003 .  The due dates for all other corporate estimated tax payments aren't changed by the 2003 Jobs and Growth Act.

These are just some of the highlights of the most important changes in the new law.  It is important to note that these changes are only temporary pending newer legislation.  If additional information is needed, please contact us at info@asherco.com.

Back to 2003 News